News Release PRELIMINARY RESULTS FOR THE YEAR ENDED 2 FEBRUARY

News Release
Release date: 13 March 2014
PRELIMINARY RESULTS FOR THE YEAR ENDED 2 FEBRUARY
2014 AND STRATEGIC UPDATE
Financial summary
 Turnover down 2% to £17.7bn (2012/13: £18.1bn)
 Like-for-like sales (ex-fuel, ex-VAT) down 2.8% (2012/13: down 2.1%)(1)
 Underlying profit before tax down 13% to £785m (2012/13: £901m)(2)
 Non-recurring exceptional costs of £903m
 Loss before tax £176m (2012/13: profit of £879m)
 Earnings per share (10.2)p (2012/13: 26.7p)
 Underlying earnings per share down 8% to 25.2p (2012/13: 27.3p)
 Final dividend of 9.2p. Total dividend for the year up 10% to 13.0p
(2012/13: 11.8p) in line with guidance
 Net debt £2,817m (2012/13: £2,181m) after capital investment of
£1,086m (2012/13: £1,016m)
Operating highlights
 Morrisons.com launched in January 2014 – performing ahead of plan
 Over 100 M local convenience stores now trading; second convenience
distribution centre now operational
 IT systems programme development progressing well – providing
platform for significant future cost savings
 18 new supermarkets opened(3)
 Fresh Formats – tailored fresh food proposition now in over 200 stores
 6,500 Own Brand products successfully launched in year; own label
conversion programme complete
 Vertical integration – good progress in expanding manufacturing
capability
 £300m, three year cost saving targets delivered
1
Strategic update
Comprehensive strategic review completed
 Enhanced focus on core supermarket business
 major investment in proposition; £300m in 2014/15
 £1bn of self help over three years identified – implementation
underway
 Acceleration of new channel development – online and convenience
 Planned exit from non-core activities, including Kiddicare and Fresh
Direct
 Property review completed
 New space pipeline reassessed
 Total non-recurring costs of £0.9bn
Resulting in:
 Stronger value leadership and a customer winning proposition
 Rebased profit outlook
 Strong balance sheet
 strong investment grade credit rating
 predominantly freehold property estate maintained
 Substantial cash flow generation
 £1bn over three years from operating improvements, working
capital and reduced capex
 £1bn of property disposals over three years
 Generation of meaningful shareholder value over the medium term
 commitment to 5% minimum increase in dividend for 2014/15 and
a progressive and sustainable dividend thereafter
 return of surplus capital as appropriate
Commenting on the results, Sir Ian Gibson, Chairman, said:
“In trading terms this has been a disappointing year for Morrisons, with
consumer confidence and market conditions continuing to be challenging. It has
however been a period of significant strategic progress as we lay the
foundations for a stronger future. Our financial position remains strong.
The review of our business undertaken by the Board, underpins our confidence
in Morrisons strategic direction and the long-term prospects of the business.
This is reflected in an increased dividend for the year ended 2 February 2014, in
line with our previous commitment and consistent with our progressive dividend
policy.
In respect of the year ending 1 February 2015 the Board anticipates that the
total annual dividend will be not less than 13.65p. Thereafter we expect
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dividends to grow more slowly than earnings, as dividend cover rebuilds towards
our target level of around two times.”
Dalton Philips, Chief Executive, said:
“The strategy we are announcing today is a bold and comprehensive response
to the fundamental structural changes that are taking place in grocery retail.
We are significantly reducing our cost base and will invest £1bn into our
proposition over the next three years, to improve our value even further and to
defend and strengthen our competitive position. Customers will see this in our
stores as well as in our fast growing online and convenience offers. At the same
time we will exit non-core activities, significantly reduce our capital expenditure
and deliver improved operating cashflow and return on capital employed.
Together with the strategic value of our vertically integrated supply chain, these
measures will provide a firm foundation from which to provide outstanding value
to our customers and to generate meaningful shareholder returns over the
medium term.
I’m confident that Morrisons will emerge from this period of necessary change as
a more focused, more distinctive value leader and well positioned to compete
sustainably in the new grocery landscape.”
Outlook
We will continue to implement a wide range of measures to address the sales
performance of the business and progress our strategic initiatives. Our
expectations are that the challenging consumer and market environment we saw
in 2013 will persist through the coming year. Our profit expectations reflect this,
and our determination to be a stronger value leader for our customers. At this
early stage in the year, we anticipate that underlying profits(4) in 2014/15 will be
in the range of £325m - £375m, after charging £65m of new business
development costs and £70m of one-off, non-recurring costs.
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Enquiries
Wm Morrison Supermarkets PLC
Trevor Strain
0845 611 5000
Investor Relations
Niall Addison
07764 624701
Media
Wm Morrison Supermarkets PLC:
Richard Taylor
Julian Bailey
0845 611 6912
07969 061092
Citigate Dewe Rogerson:
Simon Rigby
Lindsay Noton
020 7638 9571
020 7638 9571
Management will host an analyst presentation this morning at 09:30. A webcast
of this meeting is available at
http://www.morrisons-corporate.com/Investor-centre
Dial in details:
Dial in: +44 (0) 20 3003 2666
Passcode: 3665066
Replay facility available for 7 days:
Dial in: +44 (0) 20 8196 1998
Replay access code: 3665066
Unless otherwise stated all results for 2013/14 relate to the 52 weeks ended 2
February 2014 and 2012/13 results are for the 53 weeks ended 3 February
2013.
Notes
1
2
3
4
52 weeks to 2 February 2013 compared to 52 weeks to 3 February 2013
Underlying profit before taxation, property transactions, multi-channel
development costs, non-recurring exceptional write downs and IAS19
pension interest
Including one replacement store: excluding convenience stores
Based on revised definition of underlying earnings, which excludes
property transactions and IAS19 pension interest only
4
The Group’s full financial statements (comprising the consolidated statement of
comprehensive income, consolidated balance sheet, consolidated statement of
changes in equity, consolidated cash flow statement and related notes) are
available for download on the Group’s website at www.morrisonscorporate.com/investor-centre.
-ENDSThis announcement may include forward looking statements, which are
statements made about potential future events or occurrences. These
statements are made by the Directors in good faith, based on the information
available to them at the time of the announcement. Consequently such
statements should be treated with caution due to the inherent uncertainties,
including both economic and business risk factors, underlying such forward
looking statements and information.
5
Chairman’s statement
Over the past year, the grocery market(5) has remained challenging. Consumers
have had to deal with difficult economic conditions and many have been
constrained financially(6). They have had to make trade offs in their spending,
either through their choice of format, their choice of products or simply by buying
less food. This was reflected in market growth slowing in the final quarter of the
year(5).
In this environment the discount sector has performed strongly, driving much of
the market growth. We believe that its strong performance is structural, rather
than cyclical, as has been the case in previous cycles. The rest of the market
has been working hard to counter this threat, with particular emphasis on loyalty
programmes and personalised couponing, areas in which Morrisons has not
been able to participate fully to date, due to outdated IT infrastructure and
systems.
Whilst these factors, combined with the fact that we do not yet have a
meaningful presence in online and convenience - the two fastest growing
channels in the grocery market - have clearly held us back, and the overall
performance of our core business has been disappointing. We are today
announcing a commitment to address this through a significant and sustained
investment in our proposition, that underpins our determination to offer the best
value, price and quality for our customers. We will reset the profit base of the
business to deliver this.
I am pleased to report that we have made considerable progress in advancing
the strategic initiatives that we set out at the beginning of the year and which are
laying the foundation for the long term future of our business. In particular and
over a very short timeframe, we have successfully launched our own innovative,
online food proposition which will be available to half of UK households by the
end of the current financial year. We have also made considerable progress in
developing our convenience network and now have over 100 M locals with
dedicated distribution centres serving the North West as well as London and the
South East.
The Board’s confirmation of a 10% increase in the dividend for the year, in line
with its stated target, and its commitment to a minimum 5% increase in 2014/15,
demonstrate its confidence in the future of the business.
Results
In the year total turnover of £17.7bn was down 2% (2012/13: £18.1bn)
When compared to the prior year the underlying operating margin of 4.9% fell by
40bps. This increased to 50bps after adjusting for the impact of a lower
proportion of fuel sales in the mix this year.
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Net finance costs of £82m increased by £12m over the prior period as a result of
a planned increase in net debt to accommodate our peak investment of capital
expenditure.
Underlying profit is calculated after removing property disposals, IAS19 pension
interest, new business development and non-recurring exceptional costs. New
business development costs, which totalled £66m in the year (2012/13: £17m),
will be included within our definition of underlying profit from 2014/15.
Underlying operating profit(2) of £865m fell by 11% when compared to the prior
year, with underlying profit before tax(2) of £785m down by 13%.
Exceptional non-recurring costs of £903m were charged in the year including
£163m in relation to Kiddicare, a business whose performance has been
disappointing and which is no longer strategic. We will look to sell this business
in 2014.
£319m relates to elements of our store pipeline. Following a reassessment of
their potential to meet our required investment criteria we have impaired £90m of
costs incurred to date and provided for £229m of further costs. A charge of
£379m has also been incurred in relation to trading stores, comprising £330m of
impairment and £49m of onerous lease provisions.
Loss before tax was £176m (2012/13: profit of £879m).
A further cut in the rate of corporation tax and the positive impact of the Group’s
equity retirement programme, partly helped offset the impact of the reduction in
underlying earnings on earnings per share. Underlying basic earnings per share
(EPS) decreased by 8% to 25.2p (2012/13: 27.3p) with statutory basic earnings
per share of (10.2)p, (2012/13: 26.7p).
The Board is recommending a final dividend of 9.2p per share, bringing the total
dividend for the year to 13.0p, an increase of 10% on 2012/13. This is in line
with our policy of increasing our dividend by a minimum of 10% in each of the
three years to 2013/14. The dividend is covered 1.9 times by underlying
earnings.
As planned, capital expenditure and investments, including joint ventures, rose
slightly to £1,086m, an increase of £70m (7%) over prior year. This included
capital relating to the launch of our online food operation, in conjunction with
Ocado. The programme also reflected an acceleration in our convenience store
opening programme, further expansion of our vertical integration capacity and
the conclusion of the major phase of our six year IT systems development
project.
We are committed to capital discipline. With our ambition for new core grocery
space substantially fulfilled, our IT infrastructure close to completion and our
online food business now operational, 2013/14 marks the peak of our capital
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investment. In 2014/15 we expect capital expenditure to reduce by around 50%
to £550m. Thereafter we expect it to be maintained at a level of £400m annually.
During the year we concluded the £1bn equity retirement programme we
launched in 2011 with a final investment of £53m. The programme has had a
positive impact of 3.6% on our reported underlying earnings per share in the
year.
The Group’s net debt grew, as planned, during the period, to £2,817m, (2012/13:
£2,181m). Gearing increased to 60%, which has been impacted by the write
down of assets. We anticipate that we will generate significant free cash flow in
2014/15 and that net debt will fall during the year to around £2.4bn - £2.5bn.
The Group continues to maintain a strong balance sheet in line with our stated
principles. This is securely financed by a number of long dated bonds and by
revolving credit facilities of £1,350m with our banks, of which £775m remained
undrawn at the end of the year. In June 2013 we increased the funds available
to the Group and further improved the maturity profile of our borrowings, by
issuing a €700m Euro bond with institutional investors, repayable in 2020.
Return on Capital Employed (ROCE) is a key performance measure for the
Group and underpins our focus on capital discipline. 2013/14 marked a peak
year of investment for the business and as a result, ROCE fell to 8.4%, and was
impacted by the non-recurring exceptional costs in the year (2012/13: 9.6%). We
are committed to delivering improved shareholder returns over time.
Industry recognition
Morrisons is committed to providing its customers with great fresh products from
sustainable sources, backed by unrivalled service from our own in-store craft
colleagues. We are delighted that this has again been recognised with a number
of prestigious industry awards. These include: ‘Most sustainable retailer of the
year’, ‘Seafood retailer of the year’ and ‘Fresh produce retailer of the year’ at the
2013 Retail Industry awards and BitC’s European CSR award. Our support for
our colleagues in making Morrisons a great place to work, has been recognised
by the award of ‘Employer of the year’, for the fourth consecutive year, at the
Grocer Gold Awards 2013.
Community and the environment
How we operate as a business is very important to us. We care about where our
products come from, the people that make them and how products are bought,
made, moved and sold. Our corporate responsibility (CR) programme ensures
we work in a way that is right for our customers, colleagues, suppliers and
communities, creating longer term sustainable growth. Our customers expect us
to trade responsibly and we work within the communities in which we operate, to
manage resources carefully whilst maintaining ethical standards.
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Morrisons farming programme
Since 2009, the Morrisons farming programme has been at the centre of our
relationship with the farming community. The key objective of the programme is
to work closely with the UK farming supply base to ensure that it’s fit for the
future and able to provide high quality, affordable food for our customers from
sustainable production practices. The programme encourages best practice in
animal husbandry and unlocks efficiencies within the supply chain through
applied research and supplier working groups.
Ethical trading
Morrisons is fully committed to sourcing products in an ethical manner and
promoting the rights of workers throughout our worldwide supply chain. Our
Ethical Trading Code (ETC) is currently incorporated into our terms and
conditions with suppliers. Key elements are the payment of a living wage, nonexcessive working hours, a safe working environment and that employment is
freely chosen.
Groceries Supply Code of Practice (‘GSCOP’)
GSCOP came into effect in February 2010 and applies to all grocery retailers
with an annual turnover in excess of £1bn. The Group has undertaken a number
of measures to ensure compliance with the code and is committed to ensuring
that it adheres to best practice.
Payment to creditors
Supplier credit is an important factor in the success of the business. The
Group’s policy is to ensure that all payments are made within mutually agreed
credit terms.
Avoiding food waste
In addition to our retail stores, the Group owns and operates a substantial fresh
food manufacturing business. We therefore effectively control a greater
proportion of our fresh food supply chain than most major grocery retailers in the
UK, which enables us to manage and reduce associated waste. Consumer food
waste is best tackled through consistent communication, delivered in a positive
way. We’ve operated our own ‘Great Taste, Less Waste’ campaign for a number
of years delivering simple, effective and regular messages to our customers.
Let’s Grow
Our award winning Let’s Grow programme has been in operation for six years
and helps teach children about the lifecycle of food through the practical
experience of growing fresh fruit and vegetables in an outdoor environment.
Let’s Grow provides UK schools with free gardening equipment, cooking
equipment and key teaching resources. Since the scheme began in 2008, we
have now given away over £18m worth of equipment. This year, our newly
appointed in-store Community Champions helped to engage with local schools
taking part in the Let’s Grow programme, encouraging tours of Morrisons Market
Street and hosting school assemblies to explain where food comes from.
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Charity partnerships
Our colleagues, customers and suppliers always go the extra mile to support our
selected charity partner which, for the third and final year, was Save the
Children. In addition to continuing to support the Families and Schools Together
(FAST) programme, in March we also began raising funds for Eat, Sleep, Learn,
Play! an initiative which provides crisis grants for families to purchase the basic
items they need for the home such as cookers, beds, toys and books. To date
we have raised over £1.8m for the programme, taking our partnership total since
inception in 2011, to £7m.
Our colleagues
Our industry awards were only achieved through the dedication, hard work and
commitment to the cause of our 125,000 colleagues across the business who
every day seek to delight the nearly twelve million customers on average who
visit our stores each week. I am pleased that their efforts, in what has been a
challenging year for the business, have enabled them to share in a profit share
pool of £28m this year.
Colleagues are key to being able to fulfil our promises and provide the best
service to our customers. We believe in providing our colleagues with the time,
support and the qualifications they need to develop their skills. We engage with
them on a consistent basis and through regular ‘climate surveys’, we’re able to
establish the effectiveness of our communications programmes and their views.
We believe in building a healthy, high-performance culture and providing equal
opportunities for all.
On behalf of the Board I wish to thank every one of our colleagues for their
dedication, professionalism, service and commitment to our business throughout
the year.
Outlook
We will continue to implement a wide range of measures to address the sales
performance of the business and progress our strategic initiatives. Our
expectations are that the challenging consumer and market environment we saw
in 2013 will persist through the coming year. Our profit expectations reflect this
and our determination to be a stronger value leader for our customers. At this
early stage in the year, we anticipate that underlying profits(4) in 2014/15 will be
in the range of £325m - £375m, after charging £65m of new business
development costs and £70m of one-off, non-recurring costs.
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Chief Executive’s business and strategy review
Turnover
Total turnover in the period fell by 2% to £17.7bn (2012/13: £18.1bn). Store
sales excluding fuel, which included a contribution from our new online food
business for the first time, increased slightly by 0.1%. Of this, new store
openings contributed 2.9%, with like-for-like sales decreasing by 2.8%(1). Fuel
sales fell by 6.3%(1) reflecting both a fall in the average price paid for fuel at the
pump as oil prices eased during the year, and a reduction in volumes as
consumers continued to manage their budgets carefully. Other sales increased
by 30% to £262m (2012/13: £201m) as we developed external sales channels to
absorb surplus capacity in our manufacturing operations.
Turnover analysis
£m
In-store
Fuel
Other sales
Total turnover (ex-VAT)
In-store sales
Sales per square foot (£)
Customers numbers per week (m)
Customer spend (£)
Like-forlike
stores
12,990
3,878
16,868
Other
2013/14
Total
2012/13
Total
444
106
262
812
13,434
3,984
262
17,680
13,674
4,241
201
18,116
19.20
11.2
22.36
11.50
0.6
14.47
18.78
11.8
21.96
19.84
11.4
22.63
2013/14
£m
17,680
2012/13
£m
18,116
Change
%
(2)
1,074
6.1%
81
(356)
(903)
9
(95)
66
903
(9)
865
4.9%
1,206
6.7%
80
(336)
(1)
949
17
1
967
5.3%
(11)
(0.6)bps
1
(6)
(100)
1000
(110)
288
100
1000
(11)
(0.4)bps
Operating results
Turnover
Gross profit
Gross profit margin
Other operating income
Administrative expenses
Non-recurring exceptional costs
Property disposals
Operating (loss)/profit
New business development costs
Non-recurring exceptional costs
Property disposals
Underlying operating profit
Underlying operating margin
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With Group turnover falling by 2% and with inflation a continuing cost headwind,
we have had to manage our cost base very tightly across the whole of the
business. Cost control has been a key focus throughout the year, particularly in
store wages and distribution costs, our two largest cost areas after cost of goods
sold. We have therefore worked hard to make these areas more efficient whilst
continuing to ensure that we provide high levels of service to our customers
throughout. In doing this we have been able to further take advantage of the
efficiency opportunities afforded by the investment we have made in our IT
systems. This has enabled us to improve processes significantly across the
business, reducing our in-store labour costs and delivering further productivity
improvements in distribution. We have successfully met our target of delivering
£300m from our efficiency initiatives over the three years to 2013/14.
Exceptional non-recurring costs of £903m were charged in the year. This
includes £163m in relation to Kiddicare, £319m relating to elements of our store
pipeline and £379m in respect of trading stores.
We generated £9m profits on the disposal of investment properties.
Total operating loss was £95m compared to a profit of £949m in the prior year.
New business development costs, which include the trading losses of our new
channels, online and convenience, as well as the losses associated with the new
stores in Kiddicare, increased as planned to £66m (2012/13: £17m).
Underlying profit of £865m fell by 11% compared to prior year. The underlying
operating profit margin was 4.9%, 40bps below prior year or 50bps, after
adjusting for the mix of fuel in our overall sales mix.
Kiddicare
In 2011 Morrisons acquired Kiddicare, an online baby and infant merchandising
retailer, to establish itself in online retail, with the objective of using Kiddicare’s
technology and management expertise as the basis for Morrisons own online
food offer. In 2012 we expanded the business as a multi-channel retailer,
acquiring ten stores from Best Buy which have been converted into Kiddicare
showrooms to support its online proposition.
Whilst customer feedback to the Kiddicare proposition has been very positive,
the performance of the business, particularly the trading stores, has been
disappointing and has not met its financial targets. The strategic rationale for the
acquisition has been superseded by our decision to launch our online food
operation through Ocado, rather than using the Kiddicare infrastructure. A £27m
write-off of online costs incurred in setting up an independent online operation
was recognised in the first half of the year.
It is imperative that Morrisons focuses very clearly on its core grocery channel.
Kiddicare no longer fits our strategy and its poor financial performance will take
time to address. Accordingly the assets of the business have been impaired and
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a charge of £163m, including provision for onerous leases, has been taken in
the current financial year. We will seek to sell the business in 2014.
Space
In line with guidance we opened a further 18 new core stores to our estate
during the year, one of which was a replacement, as well as 90 M local
convenience format stores. Overall we now have an estate of some 14.2m
square feet of net retail space in total and 605 stores, including 102 convenience
stores. Our total net selling space increased by 812,000 square feet (6.1%), of
which 37,000 square feet came from extensions.
We are committed to capital discipline and as a result have further reduced the
capital expenditure targets we established at the Interims in September 2013. As
a consequence, our investment in new space will be primarily concentrated on
building out our existing core grocery space pipeline and on the development of
our M local convenience format.
In 2014/15 we expect to open a total of 540,000 square feet of new space, of
which c330,000 square feet will be core grocery as we build out our existing
pipeline. We will open a further c300,000 square feet of core space in 2015/16
as we complete the development of the remaining pipeline. Thereafter we will
only acquire new supermarket sites in exceptional circumstances. We expect to
open around 250,000 square feet of convenience space annually.
Market overview
Over the past year, the grocery market and consumers have continued to face
challenging economic conditions. Many customers have been constrained
financially and have had to choose carefully where they shopped, which
products they bought and in what quantity. Personalised value is playing an
ever-increasing role in consumers’ choice of store, as customers seek out the
best value.
In the year the UK grocery market grew by 3.4% and was worth £104bn (5). This
growth was primarily driven by inflation as volume growth continued to be flat to
negative. Growth fell from c4% over the first half of the year to just under 3% in
the second half(5), in line with a fall in inflation. Over the year the Consumer Price
Index (CPI) fell from 2.7% to 1.9%, with the food and drink sector a strong
contributor to this decrease(7). Across all categories the picture was mixed with
some, such as meat and fish, seeing a lower than average decrease and others,
including many dairy products, oils and fats, increasing.
Consumer confidence started 2013 at a relatively low point, but improved slightly
through the year with fewer consumers now expecting to cut back in areas that
in recent years have been badly affected by the challenging economy. In
January 2014, 46% of consumers were expecting to cut back on eating out and
31% on holidays, which compares to 53% and 38% a year earlier(6). However
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that trend has not been reflected in food shopping where the proportion that
expects to cut back, has remained broadly stable at around 23%.
Consumers saw an erosion in real earnings and although consumer confidence
improved during the year, this was driven by perceptions of the economic
situation, rather than a marked improvement in how they viewed their own
financial situation. As a result the family budget continued to be under pressure.
Consumers managed their spend carefully, wasted less, put fewer items in their
baskets and took time to look around for value. This has resulted in baskets
being spread across multiple formats and multiple retailers, and a continuing
shift in the market away from core supermarkets.
Convenience, online and the discount channels are the fastest growing sectors
of the market and this trend is expected to continue. This will be reflected in
changing format development as retailers look to align with ever evolving
customer needs, behaviours and attitudes.
The UK online food market is worth £6.5bn today(5). By the end of 2014, the
online grocery market is expected to grow to £7.7bn, up 18% on 2013 and is
forecast to grow to £14.6bn by 2018(8), when it is projected to account for 7.1%
of the total UK grocery market, almost double what it is today(8). It presents an
exciting opportunity for Morrisons.
This strong growth trend is also evident in the convenience market, as shoppers
adopt more of a “little and often” approach at the expense of big basket weekly
shops. The convenience market, which is growing at 4.9%(8), represents a huge
opportunity for Morrisons. It is currently worth £36bn in the UK and is expected
to grow by 30%(8) to £46m over the five years to 2018(8), well ahead of the
grocery market.
The year also marked the emergence of the grocery discount sector as a
significant and growing force in the market. It is currently worth £9.5bn(8), up
20%(8) over prior year. This reflects a fundamental shift in the market and one
that is likely to be structural rather than cyclical. It is a challenge that we will
address in 2014/15.
Strategy
Our vision is to be a multi-format, multi-channel grocer. We are, and always
have been a value-led grocer. We are committed to consistently low prices,
great fresh food quality with friendly, skilled, service at the heart of our business.
Morrisons is different; building on our unique heritage, we provide a distinctive
fresh food offer to our customers based around our craft skills and our vertically
integrated manufacturing business. These differences set us apart from all our
competitors and position us to succeed.
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We constantly seek to improve the way we do business, doing more of the
things that matter for our customers: making outstanding fresh food; offering
outstanding service and delivering great value.
We also seek opportunities to develop the business profitably through new
formats, channels and categories, to meet the evolving needs of our existing
customers and to attract new customers.
Our strategy reflects our view of how the market will evolve, what will be most
appealing to our customers and how we make best use of our existing
capabilities. It is based on six convictions about the type of business that our
customers want us to be:






Value is for ever
Food focused not generalist
Experiential over purely functional
Skills not just drills
General merchandise – clicks not bricks
Multi-format and multi-channel
Whilst these convictions, which form the basis of the business we are building
today, are as relevant now as when we first set them out in 2012, the grocery
market is undergoing a structural shift. The online and convenience channels
continue to grow rapidly, the discount sector is expanding at pace and core
supermarkets are under pressure.
We will address these challenges. Our strategy to compete in this intense
market is to invest significantly in our core value proposition whilst accelerating
our presence in the online and convenience channels.
Accelerating our presence in new channels
Online: food
Having spent two years building up our management expertise and researching
the market in depth, including acquiring a small stake in Fresh Direct, we
announced in July 2013 that we had completed an agreement with Ocado to
launch our own distinctive online food offer, utilising their technology platform.
This partnership route, with an established industry leader, has enabled us to
move quickly towards fulfilling our ambition to be a true, multi-channel, food
retailer.
Using the best technology and logistics operation in the sector, we’ve created
Morrisons.com - an innovative and distinctive value offer, with fresh food at its
heart. We achieved this far earlier than would have been possible had we
elected to develop our own solution in-house, and with much less execution risk.
15
The first deliveries were received by our customers in Warwickshire in January
2014, just seven months after we concluded our agreement. Feedback from our
new customers has been extremely positive and trading to date has surpassed
our initial expectations. Utilising our unique craft skills and manufacturing
capability, we’ve taken Market Street online, providing our customers with a
distinctively Morrisons experience combining our expertise in fresh food and
craft skills with the best in technology and logistics.
We differentiate our fresh offer, just as we do in store, addressing our
customers’ demand for freshness by offering an expert review quality rating and
by allowing them to check the freshness of products on their doorstep, before
accepting them.
This is one of many learning points from our association with Fresh Direct, a
leading, New York based, online food business, in which we took a stake in
2011. We have learnt a huge amount from this association and have
incorporated many of their concepts into our new food online proposition. With
an experienced management team in place and Morrisons.com now
successfully launched, we no longer need to retain this investment and will
therefore dispose of it at the appropriate time.
Our online operation will help us to serve more customers than ever before, and
will enable us to access areas in which we are under-represented today, such as
London and the South East. We are already operating in Warwickshire and
Yorkshire and will extend our offer during this year to even more customers.
During the year we will trial an innovative “click and collect” format.
Convenience
With time-poor customers shopping more frequently in convenience stores,
retailers are now targeting new locations and developing ranges to fit local
catchments, which are key drivers of basket spend. Convenience is a key
growth area for Morrisons.
Morrisons only entered this market relatively recently, with just 12 stores at the
beginning of the financial year, well behind our sector peers. Being late into the
market has been an advantage, enabling us to take account of our customers’
evolving needs and to leverage our great fresh and value credentials, to develop
a truly compelling new fresh food experience at the heart of local communities.
During the year we elected to change our convenience brand from M local to
Morrisons M local in order to develop better recognition with the wider Morrisons
brand. This was supported by an enhanced look and feel inside the stores
through improved signage and colour schemes and by emphasising our fresh
credentials which are supported by our unique vertically integrated business
model.
16
In February 2013 we announced that we had acquired 62 stores from a number
of other retailers and during the year we converted them to the M local format.
We supplemented these through the acquisition of a number of additional sites,
acquired organically. By the end of the year we had met our ambitious target of
trading 100 stores across both neighbourhood and city centre locations.
Morrisons is significantly under-represented in London and the South East,
where we have a limited presence through our core supermarkets. Our
convenience format is an opportunity to address that and we are committed to
increasing our presence there. In the year, as planned, around 70% of our new
convenience store openings were in the South and we are now represented in
key locations such as New Oxford Street, Ealing and Reading.
To facilitate this rapid expansion we acquired and opened a dedicated 100,000
square feet convenience distribution centre (CDC) in Feltham, West London,
which became operational in the first quarter of the year. We now have our M
local formats operating across the country serving some 500,000 customers
each week.
In October 2013 we opened our second dedicated CDC in Bury, Lancashire. It is
currently serving some 20 stores across the North West of England but will be
able to support up to 150 stores in all, over time. We now have the infrastructure
in place that allows us to access over 45% of the UK population. Our growth in
2014/15 will seek to optimise the capacity of our existing CDCs.
The format is proving a success and is a key element in being able to provide
our customers with a true multi-channel offer. In 2014/15 we will continue the
rapid expansion of our convenience network and expect to open up to 100
additional stores during the year. By the end of the year, we expect the
annualised sales from our convenience format to reach £400m.
Investing in our core value proposition
Whilst we have made excellent progress in online and convenience, we must
address the other key structural development in the market, discounter growth.
This is an issue which is affecting us and all the traditional grocery players.
Consumers have started to shop the discounters in the same way they would a
traditional supermarket - their perception of them has changed.
Price is not the only determinant of store choice, but it is the most important
factor. Whilst Morrisons offers so much more by way of the provenance and
range of its fresh food, in-store craft skills and great service, it is essential that in
pricing terms, we are close to the market leader.
17
In 2014/15 we will respond to this changing market place by reinforcing our core
proposition including:




investing significantly in our pricing
supporting that investment with a strong and focused promotional
programme
making our stores easier to shop, and simplifying our range
introducing a loyalty programme
We will do this whilst continuing to leverage our unique vertical integration to
offer great quality fresh food across our stores. Our Fresh Format concept is
now in over 200 stores and we will continue to roll out the programme, tailored to
local market and customers’ needs.
Saving to invest - Increasing efficiency
The programme we are launching is radical and requires significant investment.
We will fund this through accelerating our programme of self help initiatives.
We constantly look for better ways of working, removing unnecessary costs in
the context of our guiding principle that great customer service and value is core
to our business, and our customers. We need to take cost out of our business
continually, the essential self help we need to reinvest for the benefit of our
customers, to meet the structural cost headwinds we face and to support
earnings growth. We have a good track record and have made great progress
during the year. We have exceeded the £300m cost savings target we set out to
deliver through three key initiatives.
Utilising our systems
For the past six years we have been engaged in a major IT investment
programme to replace our legacy IT systems with an industry leading software
capability. It has been a challenging process affecting every aspect of our
business. We have managed it carefully through a comprehensive Board level
governance process, to ensure that we identify and mitigate risk. As we come to
the end of this long journey we are delighted with the improvements that this
programme has brought to our business.
The prime focus for the past year has been on improving our supply chain
planning and forecasting through the introduction of new tools. The solution
replaces legacy systems for the management of the warehouse, updates core
systems for the management of product information and implements new
systems to enable electronic communication with our suppliers. This technology
has provided us with the ability to track stock at every stage during its journey
through the warehouse, improving accuracy and enabling us to improve our
service levels and availability in-store.
18
We also concluded the roll out of new systems for our meat manufacturing
operations in Spalding and Colne. These have resulted in a further improvement
in manufacturing yields, traceability and compliance whilst realising significant
efficiency improvements.
This comprehensive and business transforming project has enabled us to
exceed our three year savings target of £100m. More importantly it has provided
us with an outstanding IT infrastructure, that will allow us to drive even more
efficiencies into the business in the years ahead and we will soon be in a
position to decommission our legacy IT systems.
Indirect procurement
Our indirect procurement programme was established in 2011 to help us reduce
the cost of the goods and services we use in our business whilst ensuring that
our customers were not affected by the process. In this exercise our colleagues
have been extremely supportive by helping us identify areas of significant
opportunity.
The programme involves reviewing every area of spend in the business, both
revenue and capital expenditure, looking for ways to sensibly reduce cost,
including the use of e-auctions, rate negotiations and consolidating spend.
Some of the initiatives, such as improved property maintenance, consolidated
energy savings and the purchase of consumables, were significant. Others,
including changing the specification of till rolls were smaller, but they have all
contributed. Over the three years to 2013/14 we have generated savings in
excess of the £100m target we set at the inception of the programme.
In-store productivity
In our stores we have automated our cash office processes, removing the need
for manual counting at the checkouts and streamlining our back office
processes. Our ‘First Class Filling’ initiative has enabled us to replenish our
shelves quicker and more easily, by moving many tasks outside of trading hours.
We also implemented new technology to most of our tills that has reduced the
overall checkout transaction time. A further significant change to a long
established process was the introduction of an electronic order pad that allows
colleagues to place orders via a tablet, replacing paper based systems in all our
stores.
We will also be updating and improving our merchandising in our stores,
including using more bulk pallets and merchandise display units for high volume
items as well as optimising replenishment. Individually each of these initiatives,
and the many others we have implemented - delivers a relatively small benefit
but in aggregate they are significant. We have exceeded our three year target of
delivering £100m of benefits by 2013/14.
19
Accelerating our future opportunities
Looking forward we have clear opportunities across the business to accelerate
this process in the years ahead and make us fit for the future. Utilising the
significant systems capacity we now have we will accelerate our self help
programme to realise £1bn of savings over three years, focusing on three key
areas:
1. Improving our end-to-end supply operations
2. Indirect procurement and loss prevention
3. Promotional investment and sourcing
1. Improving our end-to-end supply operations
1.1 Leveraging vertical integration
We are the second largest food manufacturer in the UK. In the past three years
we have invested over £200m in expanding and modernising our manufacturing
operations and now have outstanding facilities across many categories. Our
leadership in fresh food is based firmly on our vertical integration. Sourcing and
processing fresh food through our own facilities has long been a key point of
difference for Morrisons. In addition to the flexibility that controlling our own
supply chain brings to the business, it is a true source of competitive advantage
which enables us to offer great quality products at great prices. It also enables
us to have control over the provenance, safety and quality of our fresh products.
The flexibility we have also allows us to support our growth in the online and
convenience channels through the delivery of dedicated products direct into
those channels.
It is becoming even more important to consumers that they are able to
understand and trust where their food comes from. With slightly over half of the
fresh products we sell in store being processed through our own factories,
Morrisons is uniquely placed to offer customers the reassurance they seek.
In recent years we have invested to improve the quality and to broaden the
scope of the food we process. During the year we further established our new
seafood processing facility in Grimsby, expanded our Colne abattoir, added
further capacity through an expansion of our bakery in Wakefield and opened a
modern banana ripening facility in Boston.
We will look at further opportunities to broaden the scope of our activities by
expanding into new and relevant categories in the coming years. We will also
build on the success we had in the year by seeking to generate further external
sales across our manufacturing operations, utilising available spare capacity.
As a result of the investments we have made in our manufacturing facilities in
recent years, we now have the capacity that will enable us to transfer low value
adding processes, which are currently carried out by skilled craftsmen in our
stores, back into our manufacturing operations. This will both save costs and
20
allow our customer-serving colleagues to do what they do best - serve
customers.
1.2 Product flow and processes
The bulk of our productivity improvements to date have concentrated on our
core stores. Utilising our new systems, we believe there are further opportunities
to review our end-to-end productivity all the way from supplier to store, which will
also support the continuing development of our multi-channel, multi-format
operating model.
To improve our overall product flow we will build on the successful introduction
of electronic order pads, a process that was completed in the year. We will
further simplify a process to display products in shelf order and increase the
number of lines that are automatically re-ordered. By 2017 we’ll move to sales
based ordering to increase availability and accuracy, and increase the
centralisation of stock in our network.
We will take a different approach to how we operate in-store, replacing manual
scheduling with dynamic allocation of hours to more accurately reflect changing
trading patterns throughout the day. We will introduce technology improvements
at our checkouts and enhance the ease, service and shopping experience in our
stores.
We expect to generate a total of £300m of savings from improving our end to
end operations over the next three years.
2. Indirect procurement and loss prevention
The investment we have made over the past few years in developing our IT
systems, has provided us with the essential tools we need to be able to build
further on the savings we have generated from indirect procurement in recent
years. We have an experienced, specialist procurement team in place who will
continue to focus rigorously on all areas of cost, including the maintenance of
our checkouts.
In addition, tackling losses in our stores is an area in which we will deliver further
major savings. Losses today, including retail shrink, waste and markdown, cost
us around £450m annually. We are now in a position to use system enabled
performance tracking to focus on high risk categories.
Over the three years to 2016/17 we plan to deliver savings of £200m from these
activities.
3. Promotional investment and sourcing
The new systems-enabled tools we have will enable us to be far more focused
on how we allocate our promotional spend so that it is invested where it can
make a real impact. The tail of promotions that don’t add incremental benefit will
21
be cut and we will cut duplicative deals, simplifying the shopping experience for
our customers. The number of promoted items will be reduced by 10%.
Over the next three years we will simplify our range and reduce it by 20%,
making it even easier for customers to find the products they want. Carrying
fewer lines will simplify our operation, reduce our end-to-end supply chain costs
and drive increased volume for our suppliers.
We will work with our key branded suppliers through our M Partners programme,
to drive improved category management. In addition we’ll use our dedicated
Own Brand sourcing team to work directly with our suppliers, optimising price
and quality across our range, a process we’ve already started.
In total we expect these commercial initiatives to deliver £500m savings over the
next three years.
Investing in our core proposition
We will utilise the benefit of the self help opportunities we have to strengthen our
business and reinforce our position as a value led fresh food grocer.
Lowering price on a permanent basis
Our customers want great value for money. We will therefore make a significant
investment in permanently lowering our prices, re-enforcing our position as a
value-led fresh food grocer. This process has already started with our core fresh
Market Street categories, where we are leveraging our vertical integration to
significantly cut prices on key produce lines. Alongside our investment in fresh,
we will also reduce prices on our core grocery lines to make our offer really
competitive.
Fewer more impactful promotions
Promotions are important for our customers and we will deliver a more
compelling promotional package; cutting confusing and duplicative promotions
and investing in fewer, deeper promotions that create excitement and drive
footfall. We will support this through our manufacturing capability with
outstanding and consistent deals across Market Street.
Making Own Brand a competitive advantage
Over the last two years we have been engaged on a comprehensive and
category wide programme to establish an outstanding range of Own Brand
products. By the final quarter of 2013 that programme had been completed with
over 10,000 products re-launched and we now have a range that is recognised
and valued by our customers. Own Brand penetration of our sales mix has
increased through the life of the programme and now accounts for some 49% of
our total sales in store, up from 47% when the re-launch process started.
With own brand participation continuing to grow in the UK market and it being a
strong proxy for overall retailer value offered, there is still more to do. The
market is continually evolving, along with customers’ perception of value. The
22
differences between the tiers are becoming blurred; customers now expect midtier quality at value opening price points.
Looking ahead therefore we will simplify our range, reduce excessive pack
variants and varieties, making it more productive as well as easier for customers
to shop. We will also re-engineer and invest significantly in our value proposition,
offering good quality at truly great prices, making our Own Brand range a source
of competitive advantage.
Improving product quality, making our stores even easier to shop
Our great, fresh quality food is a key strength of this business.
Further investment in our chill chain, combined with our improvements to
product flow and range reductions will drive higher volumes, leading to even
better availability, longer shelf life, and better quality.
Our store environment is a fundamental point of difference for us. In our Fresh
Formats stores we have dramatically increased the visibility of our fresh food
proposition. There are, however, areas where we can do more and which matter
to our customers. We will remove unnecessary aisle clutter and make our
products even easier to find.
Launching a Morrisons card
For many years we have been at a significant disadvantage to our competitors,
because of a lack of IT systems capability, an essential prerequisite to really
understanding customers at an individual level. We will be able to match our
competitors in offering our customers tailored offers.
We do already have a loyalty scheme, Morrisons Miles, which rewards the over
five million customers who buy fuel from us. In the first quarter of the year we will
start to build on that asset, by registering our Morrisons Miles cardholders.
The bigger opportunity lies in the 12m customers who shop with us in store.
Getting to know them – who they are and what they want – will enable an even
greater opportunity to focus where we invest. We now have the necessary
systems capability and have commenced trialling a distinctive and customerfocused Morrisons card, which we expect to roll out before the end of the
2014/15 financial year. This is an outstanding opportunity to interact with our
customers and will enable an even greater step change to the way in which we
invest in our commercial proposition.
Focussed and consistent communications
This year we will focus our communication on our substantially low prices and
stunning deals. We’ll link that communication to the Morrisons brand, so that it’s
clear what we offer beyond price and promotions. Great value, supported by
unrivalled service and skill in producing and selling great quality fresh food value without compromise.
23
Financial strategy
Morrisons business has traditionally been based on strong financial principles:
conservative and prudent accounting policies, well funded pension schemes, a
robust balance sheet and a strong, investment grade credit rating.
We have identified significant opportunities to generate substantial free cash
flow through growth, meaningful reductions in capital expenditure, improved
management of our working capital and from property disposals. We will
maintain our balance sheet strength, underpinned by a disciplined approach to
capital management, supported by a commitment to a strong, investment-grade,
credit rating over the medium term.
Capital expenditure
Our capital expenditure programme has three elements: the maintenance of our
asset base; the development of our infrastructure and the growth of our new
channels and manufacturing capability. The total of £1.1bn that we spent in
2013/14 represents the peak level of our capital expenditure investment and will
reduce significantly in the years ahead.
Our future top line growth will be driven principally through the fast growing
online and convenience channels, both of which are relatively capital-light
compared to developing new supermarket space. Accordingly our investment
focus in future will be on these channels. We will only acquire new supermarket
sites in exceptional circumstances.
As a result of these measures, our requirement for capital expenditure has been
reduced significantly from its current year level of £1.1bn, and from previous
guidance, to £550m in 2014/15, reducing to around £400m annually thereafter.
Working Capital
Our ongoing investment in upgrading IT systems across the whole business
continues to progress and will provide significant opportunities to optimise our
control of working capital, particularly in relation to inventory and the
management of our supply chain. We are committed to efficient working capital
management and believe that we have opportunities to generate £600m from
this area over the next three years.
Property
Morrisons property portfolio has an estimated market value of around £9bn.
Over 90% of our core estate is freehold, a considerably greater proportion than
our major competitors. As indicated at our Interim Results we have been
reviewing opportunities to manage our property portfolio more actively than we
have historically, in order to release surplus cash whilst improving shareholder
returns. This review has been undertaken on the basis that we will:

value the clear control and flexibility benefits associated with freehold
ownership of stores
24



retain an overwhelmingly freehold position in our core estate – strongest
in the sector
maintain a strong, conservative and prudent capital structure
not change the risk profile of the Company
It is expected that the freehold element of our core estate will not fall below 80%,
the highest ratio in the sector.
In line with these criteria we plan to monetise some £1bn of property value by
2016/17. We will do this through the disposal of our development assets, our
newer distribution assets and our investment properties including, in a small
number of cases where it makes sense to do so, the associated stores. We
expect to realise £400m-£500m of disposals in 2014/15.
Shareholder returns
The current year is the final year of a three year commitment, made in March
2011, to provide a minimum annual dividend increase of 10%.
The Board’s confidence in Morrisons strategic direction and the long-term
prospects of the business is reflected by its commitment to a progressive
dividend policy, moving to two times cover over time. This is underpinned by a
commitment to a minimum 5% increase in 2014/15.
Capital allocation
At our Interim Results announcement in September 2013 we set out a
framework by which we would allocate capital within our business. Our first
priority is to invest to support our estate and infrastructure and to reduce our
cost base. Thereafter we will seek to maintain debt ratios which support a strong
investment grade credit rating, before investing in profitable growth opportunities
and paying dividends in line with policy. Any capital which is surplus to these
requirements will be returned to shareholders over time.
We anticipate that the combination of a reduction in capital investment,
improvements in our working capital and an active property estate management
programme as set out above, will lead to the generation of significant free cash
flow. Subject to our commitment to an investment grade credit rating over the
medium term, this will be returned to shareholders in an appropriate form, to be
determined at the start of each financial year.
Our balance sheet is strong. We have a valuable real estate portfolio, which
provides great flexibility to the business. We will realise value from our property
portfolio, whilst retaining a significantly higher freehold mix than our peers. We
have substantial free cash flow generation opportunities. Overall, we expect to
generate £2bn of free cashflow in the three years to 2016/17.
25
Notes
1
2
3
4
5
6
7
8
9
52 weeks to 2 February 2013 compared to 52 weeks to 3 February 2013
Underlying profit before taxation, property transactions, multi-channel
development costs, non-recurring exceptional write downs and IAS19
pension interest
Including one replacement store: excluding convenience stores
Based on revised definition of underlying earnings, which excludes
property transactions and IAS19 pension interest only
Kantar Worldpanel Total Grocery
IGD Shoppertrends Q1 2014
Office of National Statistics
IGD UK Channel Forecast 2013-18
IGD
26
Wm Morrison Supermarkets PLC - Preliminary results for 52 weeks ended 2
February 2014
Consolidated statement of comprehensive income
52 weeks ended 2 February 2014
Note
3
Turnover
Cost of sales
Gross profit
Other operating income
Administrative expenses
Administrative expenses include:
Recurring
Non-recurring exceptional costs
Operating (loss)/ profit
Finance costs
Finance income
Share of profit of joint venture (net of tax)
(Loss)/ profit before taxation
Taxation
(Loss)/ profit for the period attributable to the owners of
the Company
Other comprehensive income/(expense)
Items that will not be reclassified to profit or loss:
Remeasurements of defined benefit pension schemes
Tax on defined benefit schemes
4
4
5
10
5
Items that may be reclassified subsequently to profit or
loss:
Cash flow hedging movement
Tax on cash flow hedging movement
5
Other comprehensive expense for the period, net of tax
Total comprehensive income for the period attributable to
the owners of the Company
Earnings per share (pence)
- basic
- diluted
7
7
27
2014
£m
2013
£m
17,680
(16,606)
1,074
18,116
(16,910)
1,206
81
(1,250)
80
(337)
(347)
(903)
(95)
(87)
5
1
(176)
(62)
(337)
949
(75)
5
879
(232)
(238)
647
11
(8)
3
(6)
(2)
(8)
(1)
(2)
-
(1)
(2)
2
(10)
(236)
637
(10.23)
(10.23)
26.65
26.57
Consolidated balance sheet
2 February 2014
Note
Assets
Non-current assets
Goodwill and intangible assets
Property, plant and equipment
Investment property
Investment in joint venture
Investments
8
9
Current assets
Stocks
Debtors
Derivative financial assets
Cash and cash equivalents
Liabilities
Current liabilities
Creditors
Short term borrowings
Derivative financial liabilities
Current tax liabilities
Non-current liabilities
Borrowings
Derivative financial instruments
Deferred tax liabilities
Net pension liabilities
Provisions
10
Net assets
Shareholders’ equity
Called-up share capital
Share premium
Capital redemption reserve
Merger reserve
Retained earnings and hedging reserve
Total equity attributable to the owners of the Company
28
2014
£m
2013
£m
458
8,625
119
66
31
9,299
415
8,616
123
31
9,185
852
316
1
261
1,430
781
291
5
265
1,342
(2,272)
(553)
(10)
(38)
(2,873)
(2,130)
(52)
(3)
(149)
(2,334)
(2,480)
(36)
(430)
(11)
(207)
(3,164)
4,692
(2,380)
(16)
(471)
(20)
(76)
(2,963)
5,230
234
127
39
2,578
1,714
4,692
235
107
37
2,578
2,273
5,230
Consolidated cash flow statement
52 weeks ended 2 February 2014
Note
Cash flows from operating activities
Cash generated from operations
Net interest paid
Taxation paid
Net cash inflow from operating activities
11
Cash flows from investing activities
Investment in joint venture
Proceeds from sale of property, plant and equipment
Purchase of property, plant and equipment, investment property and
software
Purchase of intangible assets
Cash outflow from acquisition of businesses, net of cash acquired
Net cash outflow from investing activities
Cash flows from financing activities
Purchase of own shares
Purchase of treasury shares
Proceeds from exercise of share options
New borrowings
Repayment of borrowings
Dividends paid to equity shareholders
Net cash inflow/(outflow) from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at start of period
Cash and cash equivalents at end of period
12
2014
£m
2013
£m
1,031
(96)
(220)
715
1,432
(82)
(243)
1,107
(66)
34
5
(835)
(185)
(1,045)
(846)
(134)
(36)
(1,011)
(53)
28
790
(157)
(283)
325
(514)
(65)
42
843
(81)
(270)
(45)
(5)
263
258
51
212
263
Reconciliation of net cash flow to movement in net debt in the period
Note
Net (decrease)/increase in cash and cash equivalents
Cash outflow from decrease in debt and lease financing
Cash inflow from increase in loans
Other non-cash movements
Opening net debt
Closing net debt
12
29
2014
£m
2013
£m
(5)
51
157
81
(790)
(843)
2
1
(2,181)
(1,471)
(2,817)
(2,181)
Consolidated statement of changes in equity
52 weeks ended 2 February 2014
Attributable to the owners of the Company
Share
capital
£m
Current period
At 4 February 2013
Loss for the period
Other comprehensive income:
Pension remeasurements
Tax in relation to components of
other comprehensive income
Total comprehensive income for the
period
Shares purchased for cancellation
Employees share options schemes:
Issue of shares and utilisation of
treasury shares
Share-based payments
Dividends
Total transactions with owners
At 2 February 2014
Merger
reserve
Hedging
reserve
Retained
earnings
Total
equity
£m
£m
£m
£m
235
107
37
2,578
(14)
-
-
-
-
-
2,287
(238)
5,230
(238)
-
-
-
-
(1)
11
(8)
11
(9)
-
-
-
-
(1)
(235)
(236)
(2)
-
2
-
-
(53)
(53)
1
20
-
-
-
7
28
(1)
234
20
127
2
39
2,578
(15)
6
(283)
(323)
1,729
6
(283)
(302)
4,692
Share
capital
£m
Prior period
At 29 January 2012
Profit for the period
Other comprehensive income:
Actuarial loss arising in the
pension scheme
Cash flow hedging movement
Tax in relation to components of
other comprehensive income
Total comprehensive income for the
period
Shares purchased for cancellation
Employees share options schemes:
Treasury share scheme
purchases and utilisation for share
options
Share-based payments
Dividends
Total transactions with owners
At 3 February 2013
Share
Capital
premium redemption
reserve
£m
£m
Attributable to the owners of the Company
Share
Merger
Hedging
Retained
Capital
premium redemption
reserve
reserve
earnings
reserve
£m
£m
£m
£m
£m
Total
equity
£m
253
-
107
-
19
-
2,578
-
(12)
-
2,452
647
5,397
647
-
-
-
-
-
(6)
(6)
-
-
-
-
(2)
-
(2)
(2)
(2)
-
-
-
-
(2)
639
637
(18)
-
18
-
-
(514)
(514)
-
-
-
-
-
(24)
(24)
(18)
235
107
18
37
2,578
(14)
4
(270)
(804)
2,287
4
(270)
(804)
5,230
30
1. General information and basis of preparation
The financial information, which comprises the consolidated statement of comprehensive income, consolidated balance
sheet, consolidated statement of changes in equity, consolidated cash flow statement and related notes, is derived from
the full Group financial statements for the 52 week period ended 2 February 2014, which have been prepared under
European Union endorsed International Financial Reporting Standards (IFRS) and those parts of the Companies Act
2006 applicable to companies reporting under IFRS.
It does not constitute full accounts within the meaning of section 434 of the Companies Act 2006. This financial
information has been agreed with the auditor for release. The Group’s full financial statements (comprising the
consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in
equity, consolidated cash flow statement and related notes) are available for download on the Group’s website at
www.morrisons.co.uk/
The full annual report and financial statements for the year ended 2 February 2014 on which the auditor has given an
unqualified report and which does not contain a statement under section 498 of the Companies Act 2006, will be
delivered to the Registrar of Companies in due course. The annual report and financial statements will be made available
to shareholders from 21 April 2014.
The accounting policies used in completing this financial information have been consistently applied in all periods shown,
except as shown below. These accounting policies are detailed in the Group's financial statements for the 52 week
period ended 2 February 2014 which can be found on the Group's website (www.morrisons-corporate.com).
IAS 19 (2011) Employee benefits
As a result of IAS 19 (2011), the Group has changed its accounting policy with respect to the basis for determining the
income or expense related to the net pension liability. Under IAS 19 (2011), the Group determines the net interest
expense (or income) for the period on the net pension liability (or asset) by applying the discount rate used to measure
the defined benefit obligation at the beginning of the annual period to the net pension liability (or asset) at the end of the
annual period, taking into account any changes in the net pension liability (or asset) during the period as a result of
contributions and benefit payments. Previously, the Group determined interest income on plan assets based on their long
term rate of return.
The effect of this change in the 52 weeks ending 2 February 2014 is to reduce net interest income on the net pension
liability by £17m (3 February 2013: £5m) and increase administration costs in operating loss by £3m (3 February 2013:
£2m). Actuarial gains in other comprehensive income are reduced by £20m (3 February 2013: actuarial losses increased
by £3m). There is no effect on the net pension liability in the balance sheet. The results for the 53 weeks ended 3
February 2013 have not been restated for the change described above because the change is
immaterial to the Group’s results in that comparative period.
IAS 1 (amendment) Presentation of items of other comprehensive income
As a result of the amendments to IAS 1, the Group has modified the presentation of items of other comprehensive
income in order to present separately items that would be reclassified to profit or loss in the future from those that would
not be. Comparative information has been represented accordingly.
IFRS 13 Fair value measurement
IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurement,
when such measurements are required or permitted by other IFRSs. The standard had no impact on the measurement of
the Group’s assets and liabilities, but has introduced some new disclosures. In accordance with the transitional
provisions of IFRS 13, the Group has applied the new fair value measurement guidance prospectively and has not
provided any comparative information for new disclosures.
New IFRS and amendments to IAS and interpretations
There are a number of standards and interpretations issued by the IASB that are effective for financial statements after
this reporting period. The application of these standards and interpretations, which include IFRSs 10–12, is not
anticipated to have a material effect on the Group’s financial statements.
31
Principal risks
As with all businesses, we face risk and uncertainty, which could impact the delivery of our strategy. The Board has
overall accountability for ensuring that risks are effectively managed across the Group, and that there is a system for
internal control. The Management Board is responsible for implementing and maintaining the system of controls. In
accordance with the Companies Act 2006, a description of the principal risks (and the mitigating factors in place in
respect of these) is included below.
Risk
Description
Business change
In order to drive productivity and adapt
to structural changes in the market we
are undertaking a number of major
change programmes that will
significantly impact on existing ways of
working. There is a risk that the business
fails to build the capacity and capability
to support the volume of business
change, resulting in service disruption or
unintended costs.
Business
interruption
Business strategy
Colleague
engagement and
retention
Mitigation
Our distribution and systems
infrastructures are fundamental to
ensuring the normal continuity of trading,
whether that is via our stores or online. If
a major incident occurred to this
infrastructure or another key facility, this
could have a detrimental impact on our
ability to operate effectively.
Effective long term management of the
Group’s strategic risks will deliver
benefits to all our stakeholders. The
Board understands that, if the strategy
and vision are not properly formulated,
communicated or implemented, then the
long term aims of the Group may not be
met and the business may suffer.
We are a people business and our
125,000 colleagues are key to being
able to fulfil our promises. If we fail to
retain, develop and motivate our
colleagues, we will not provide the
quality of service that we are expected
to.
32

Organisation Design structures and support
established for all strategic change initiatives;
and

Comprehensive governance embedded
across the business including Business and
Technical Design Authorities.

Recovery plans exist for sites and systems;

Investment in remote IT disaster recovery site
and regular testing of recovery plans;

Adherence to a stringent process for
evaluating new suppliers/third parties; and

Contingency arrangements confirmed for key
suppliers.

Strategy development led by the Chief
Executive and senior management with Board
scrutiny and approval;

Engagement with a wide group of
stakeholders to ensure the strategy
remains current;

Communication of strategy via numerous
channels;

Clear link between strategic targets and
business plans to drive implementation; and

Close Board monitoring of business
performance.

Competitive employment policies,
remuneration and benefits packages
established;

Significant investment in training and
development, including Morrisons Academy
and Coaching for Performance programmes;

Regular talent reviews and refresh of
succession plans to meet the future needs of
the business; and

Climate and pulse surveys undertaken to
understand and respond to colleague
concerns.
Principal risks (continued)
Risk
Description
Customer
proposition
We operate in a highly competitive
industry and our customers’ shopping
habits are influenced by broader economic
factors that our business does not control.
If we fail to keep our proposition aligned
with customers’ expectations, by not
analysing long term market trends and
maximising on opportunities, then they
may choose not to shop with us and sales
will suffer.
Financial and
treasury
Food and product
safety
IT systems
Mitigation
The main financial risks that the Group is
exposed to relate to the cost of funding,
the loss of a financial counterparty and the
uncertainty produced by fluctuations in
interest and foreign exchange rates. All of
these things have the potential to
undermine the Group’s ability to finance its
trading activities and its financial results.
If we fail to deliver excellent standards of
hygiene and safety in our products, there
is a potential to harm our customers and
damage our business reputation. Our
business focuses on fresh food and we
have a vertically integrated business
model; therefore, food safety is of
paramount importance.
We have replaced and upgraded systems
in our business to provide industry-leading
software capability. We continue to roll out
new systems and decommission legacy IT
systems. We are aware of the risks and
potential for delays and increased costs
associated with delivery.
33

The Insight team provide the business with
data and analysis to helps explain
customer needs and wants to inform
product ranging, marketing, advertising and
also the location of new stores;

Regular review of positioning against
competitors; and

Introduction of a customer focussed
Morrisons loyalty offer before the end of
2014/15

Treasury Committee controls activities in
line with Board approved policies and
procedures and reports twice a year to the
Audit Committee;

Hedging and derivatives used to control risk
and protect the business rather than create
profit; and

Board approval of budgets and business
plans.

Strict standards and monitoring processes
established to manage food safety risks
throughout the Group and supply chain;

ISO22000 accreditation of food
manufacturing businesses;

Regular supplier assessments undertaken
to ensure adherence to standards;

Stock withdrawal procedures operate
throughout our supply chain to minimise the
impact to customers of any supplier recalls;
and

Food Safety Steering Group, Management
Board and Main Board provide oversight of
operational activities.

We partner with some of the world’s leading
technology companies for key projects;

Project management methodology is
applied to all IT projects and programmes;
and.

Regular reviews are undertaken by Risk
and Internal Audit and other specialists to
provide assurance over significant IT
projects and programmes delivering into the
business.
Principal risks (continued)
Risk
Description
Regulation
The Group operates in an environment
governed by strict regulations to ensure
the safety and protection of customers,
shareholders, colleagues and other
stakeholders, and the operation of an
open and competitive market. These
regulations include alcohol licensing,
health and safety, the handling of
hazardous materials, data protection, the
rules of the stock exchange and
competition law. In all cases, the Board
takes its responsibilities very seriously,
and recognises that breach of regulation
can lead to reputational and financial
damage to the Group.
Reputation
Mitigation
We are committed to taking good care
and, if we fail to act as a responsible
corporate citizen or misjudge the ‘mood
of the nation’, this could damage our
reputation and, therefore, potentially lose
the trust of our stakeholders and
increase costs.

Clear accountabilities for compliance with all
areas of regulation exist;

Policies and procedures designed to accord
with relevant laws and regulations, including
GSCOP and Competition Law training; and

Health and Safety and Compliance Steering
Group together with the Management Board
and Corporate Compliance and Responsibility
Committee oversee compliance with
regulatory requirements.

Morrisons Values embedded into colleague
Performance Development Review process;

Corporate Responsibility policies, targets and
key performance measures clearly defined
and integrated into operational management
activities;

Responsible Sourcing Group, Management
Board and Corporate Compliance and
Responsibility Committee oversee delivery
against targets; and

External assurance of Morrisons’ Corporate
Responsibility report.
Further information is available in our
Corporate Responsibility report at
www.morrisons-corporate.com/cr
Space optimisation
Trading optimisation
The business is committed to capital
discipline. Within this it acquires,
develops and disposes of properties. If
we fail to adequately optimise our space
profitably, our earnings will suffer.
We operate in a competitive market and
our trading teams continually make
decisions that affect the offer to our
customers whilst managing the
relationships with our suppliers. If the
business fails to optimise these trading
decisions we increase the chances of
missing commercial opportunities and
potentially decreasing sales and
margins.
34

Property strategy develops stores to a well
proven format;

Formal capital approval process, overseen by
the Investment Board, which reports into the
Management Board;

Increasing experience of opening and
developing convenience stores; and

The operation of a robust impairment review
process.

Investment in core commercial processes and
ways of working;

Scenario modelling; and

Buyer development programmes.
Responsibility statement
This statement is given pursuant to Rule 4 of the Disclosure and Transparency Rules. It is given by each of the
Directors.
To the best of each Director's knowledge:
a) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and
fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the
consolidation taken as a whole; and
b)
the strategic report includes a fair review of the development and performance of the business and the position of
the Company and the undertakings included in the consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face.
2. Underlying profit
The Directors consider that underlying earnings per share measures referred to in the preliminary announcement provide
useful information for shareholders on underlying trends and performance and reflects how the business is monitored
internally. The adjustments are made to reported profit to (a) remove the impact of pension interest income volatility; (b)
remove losses or profits arising on property transactions since they do not form part of the Group’s principal activities; (c)
remove costs of new business development activity; (d) remove significant one-off costs that do not relate to the Group’s
principal activities; and (e) apply a tax rate of 25.3% (2013: 26.5%), being an estimated normalised tax rate.
2014
£m
(238)
62
(176)
2013
£m
647
232
879
1
(9)
66
58
4
1
17
22
163
379
319
42
903
785
(199)
586
901
(239)
662
- basic
25.18
27.26
- diluted
25.09
27.17
(Loss)/profit after tax
Add back: tax charge for the period1
(Loss)/profit before tax
Adjustments for:
Net pension interest income expense1
(Profit)/loss arising on property transactions1
New business development costs1
Non-recurring exceptional costs :
Kiddicare impairment1
Trading stores1
Pipeline1
Other impairment1
Underlying profit before tax
Taxation1
Underlying profit after tax charge
Underlying earnings per share (pence)
1
Adjustments equal £824m (2013: £15m) as shown in the reconciliation of earnings disclosed in note 7(b).
35
3. Sales analysis
Like-for-like
stores
£m
Other
£m
2014
Total
£m
2013
Total
£m
Sale of goods in-stores
Fuel
12,990
3,878
444
106
13,434
3,984
13,674
4,241
Total store based sales
Other sales
16,868
-
550
262
17,418
262
17,915
201
Total turnover
16,868
812
17,680
18,116
Fuel sales are removed from quoted like-for-like figures given the volatility in the fuel price to provide a more stable
measure.
4. Finance costs and income
2014
£m
2013
£m
Interest payable on short term loans and bank overdrafts
Interest payable on bonds
Interest capitalised
(12)
(86)
17
(11)
(69)
15
Total interest payable
Provisions: unwinding of discount
Other finance costs
Net pension interest expense
(81)
(3)
(2)
(1)
(65)
(4)
(2)
(4)
Finance costs
Bank interest received
Amortisation of bonds
Finance income
(87)
3
2
(75)
3
2
5
5
Net finance cost
(82)
(70)
5. Taxation
Corporation tax
- current period
- adjustment in respect of prior period
Deferred tax
- origination and reversal of timing differences
- adjustment in respect of prior period
- impact of change in tax rate
Tax charge for the period
2014
£m
2013
£m
158
(46)
261
(32)
112
229
(12)
30
(68)
(3)
47
(41)
(50)
3
62
232
Legislation to reduce the rate of corporation tax from 23% to 20% was included in the Finance Act 2013. As it had been
substantively enacted at the balance sheet date the deferred tax balances as at 2 February 2014 have been measured at
this rate. The impact of this change in tax rate results in a credit of £66m to the Income statement, and a debit of £6m to
Other comprehensive income. There have been no indications of any further changes in the rate of corporation tax from
20%.
36
6. Dividends
Amounts recognised as distributed to equity holders in the period:
Interim dividend for the period ended 2 February 2014 of 3.84p (2013: 3.49p)
Final dividend for the period ended 3 February 2013 of 8.31p (2012: 7.53p)
2014
£m
2013
£m
90
193
84
186
283
The Directors are proposing a final dividend in respect of the financial period ending 2 February 2014 of 9.16p per share
which will absorb an estimated £214m of shareholders’ funds. Subject to approval at the Annual General Meeting, it will
be paid on 11 June 2014 to shareholders who are on the register on 9 May 2014.
270
7. Earnings per share
Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the period.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume
conversion of all potentially dilutive ordinary shares. The Company has two (2013: two) classes of instrument that are
potentially dilutive: those share options granted to employees where the exercise price is less than the average market
price of the Company’s ordinary shares during the period and contingently issuable shares under the Group’s long term
incentive plan (LTIPs).
a) Basic and diluted earnings per share (unadjusted)
Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:
2014
2013
Earnings
£m
Weighted
average
number of
shares
millions
EPS
pence
Weighted
average
number of
shares
millions
(238)
2,327.0
(10.23)
Earnings
£m
EPS
pence
Unadjusted EPS
Basic EPS
Earnings attributable to ordinary shareholders
647
2,428.0
26.65
Effect of dilutive instruments
Share options and LTIPs
Diluted EPS
-
-
-
-
7.0
(0.08)
(238)
2,327.0
(10.23)
647
2,435.0
26.57
b) Underlying earnings per share
Given below is the reconciliation of the earnings used in the calculations of underlying earnings per share:
Earnings
£m
2014
Weighted
average
number of
shares
millions
EPS
pence
(238)
2,327.0
(10.23)
647
2,428.0
26.65
824
-
35.41
15
-
0.61
586
2,327.0
25.18
662
2,428.0
27.26
Earnings
£m
2013
Weighted
average
number of
shares
millions
EPS
pence
Underlying EPS
Basic EPS
Earnings attributable to ordinary shareholders
Adjustments to determine underlying profit
(note 2)
37
Effect of dilutive instruments
-
9.0
(0.09)
-
8.5
(0.09)
586
2,336.0
25.09
662
2,436.5
27.17
Share options and LTIPs
Diluted EPS
The weighted average number of shares has decreased compared to the prior period as a result of the Group’s equity
retirement programme.
8. Goodwill and intangible assets
2014
£m
2013
£m
At beginning of the period
415
303
Additions at cost
178
134
Net book value
7
7
Amortisation
(53)
(29)
Impairment
(89)
-
At end of the period
458
415
2014
£m
2013
£m
8,616
7,943
-
20
Transfer (to)/from investment property
(15)
132
Additions at cost
807
854
10
8
Interest capitalised
9. Capital expenditure and commitments
a) Property, plant and equipment
Net book value
At beginning of the period
Acquired in a business combination
Interest capitalised
-
(6)
Depreciation charge for the period
Impairment
(336)
(457)
(335)
At end of the period
8,625
8,616
Disposals
b) Investment property
In addition to the depreciation charge above of £336m, £5m (2013: £4m) is charged on investment properties.
Contracts placed for future capital expenditure not provided in the financial statements amount to £179m (2013: £77m)
10. Pensions
The Group operates three defined benefit retirement schemes (together ‘the Schemes’) providing benefits based on a
benefit formula that depends on factors including the employee’s age and number of years of service. The Morrison and
Safeway Schemes provide pension benefits based on either the employee’s compensation package or career average
revalued earnings (CARE) (the ‘CARE Schemes’). The CARE Schemes are generally not open to new members. The
Retirement Saver Plan (‘RSP’) is a cash balance scheme, which provides a lump sum benefit based upon a defined
proportion of an employee’s annual earnings, which is revalued each year in line with inflation.
The latest full actuarial valuations are being carried out as at 1 April 2013 for the Safeway Scheme and 5 April 2013 for
the Morrison Scheme and the RSP. The preliminary results of these valuations have been used and updated for IAS 19
‘Employee benefits’ purposes for the period to 2 February 2014 by a qualified independent actuary.
38
10. Pensions (continued)
The movement in the net pension liability during the period was as follows:
Net pension liability at start of the period
Expected return on scheme assets
Interest cost
Net interest cost
Actuarial loss recognised in other comprehensive income
Remeasurements in Other Comprehensive Income
Employer contributions
Current service cost
Administrative cost
Net pension liability at end of the period
2014
2013
£m
(20)
(1)
11
34
(32)
(3)
(11)
£m
(11)
120
(124)
(6)
33
(32)
(20)
On 24 September 2012, the Group opened a new post retirement benefit plan, the Morrisons Retirement Saver Plan. The
scheme provides a lump sum benefit based upon a defined proportion of an employee’s earnings each year, revalued in
line with a guaranteed rate prior to retirement. All employees joining the Group after 24 September 2012 are
automatically enrolled.
11. Cash flow from operating activities
2014
£m
(238)
2013
£m
647
62
232
Depreciation and amortisation
394
339
Impairment
546
29
(Loss)/profit for the period
Adjustments for:
Taxation
(Profit)/loss on disposal of property, plant and equipment
(9)
1
Net finance cost (note 4)
82
70
Other non-cash charges
3
1
Excess of contributions over pension service cost
2
-
Increase in stocks
(71)
(22)
(Increase)/decrease in debtors
(25)
(29)
Increase in creditors
154
114
Increase/(decrease) in provisions
Cash generated from operations
39
131
(8)
1,031
1,432
12. Analysis of net debt
Cash and cash equivalents per balance sheet
Bank overdrafts
Cash and cash equivalents per cash flow
Foreign exchange forward contracts
Energy price contracts
Other financial assets
Short term borrowings and current bonds
Energy price contracts
Forward foreign exchange contracts
Current financial liabilities
Bonds
Private placement loan notes
Floating credit facility
Other unsecured loans
Forward foreign exchange contracts and interest rate swaps
Energy price contracts
Finance lease obligations
Non-current financial liabilities
Net debt
40
2014
£m
261
(3)
258
1
1
(550)
2013
£m
265
(2)
263
4
1
5
(50)
(6)
(4)
(560)
(3)
(53)
(1,759)
(149)
(572)
(34)
(2)
(2,516)
(2,817)
(1,346)
(156)
(671)
(200)
(12)
(4)
(7)
(2,396)
(2,181)